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FIB - Scams 101 - Ye Olde Archives
Posted By: Mel. White In Response To: MLMs are a bad business model??? ===not=== (Bob Baroner)
Saturday, 3 December 2005, at 1:40 p.m.
Let's look at the MLM business model in respect to an ordinary business. I'll use my gemstone importing business (30 years ago) as a model though it also held true for my other businesses.
In MLM, you join (we'll be kind and assume there's no joining fee though this is not always true and that there's no autoship fee) and you run off to sell something. We will also (unrealistically) assume that you have an original product or that there are not 35,000 other dealers in competition with you.
I'll use a typical Mangosteen chain, though there are others:
http://www.naturalhealthshoppe.com/index.asp?PageAction=Custom&ID=39
You sell product. You get 5% of what you sell and the rest gets passed upline. You recruit someone and you get 5% of what they sell plus 5% of what YOU sell (apparently) and you pass some of that on to those above you... etc, etc. If you look at the chart (for the last rank on the right), the company is paying out over 50% of its profit -or more- to the distributors. If there is no bottom to the pyramid, in a few more levels they could be paying out as much as 80%. So they have to inflate the cost of their product. At each step the seller only gets 5%... and if you've got only one person at the bottom of the chain running around and selling while everyone else manages, the company isn't really moving much product or getting much income in spite of having a big chain of downline.
Compare it to the gem business:
The miner mines the stone. It's sold to a cutter. The cutter sells it to a wholesaler (me). I set the stone and sell it to the customer (a jewelry dealer) who sells it to a final customer. At each step there's approximately a 200% markup and the person keeps the profit.
Not a piddly 5%. Nor do I have to pay 95% of what I make to an upline whose only efforts may be to tell me I can do better and that I'm a success with my tiny 5% profit and that I need to keep selling because I'm wonderful.
From the business's end, the Mangosteen business gets less than 50% profits for each bottle sold. They have to run a manufacturing plant, pay workers, pay shipping, pay bottling costs, pay the distributors, maintain a warehouse and other business locations, buy materials... and if they don't do any R&D and come out with new products their market will be eaten by someone else with New And Improved Stuff.
So we have an MLM business that gets less than 50% on each sale with huge numbers of salesmen who are saturating markets. Compare that to a gem business like Znetshows.com. They keep ALL their profit (a 200%-800% markup.) There's no kickbacks to downlines. In lieu of a thousand people who sign up to market and then are unable to sell anything, they can put the $500 to pay a downline chain into a large display ad for magazines or newspapers... and these ads usually pull in 5 to 10 times their original cost. If you have salesbeings for this kind of business, they typically get around 30% (not 50-80 to a downline) of sales. So even the salespeople get a much better deal than the MLMers, who are being fed hype and a 2%-5% return.
So MLMs are extremely inefficient. They also don't limit the number of salespeople or set out territories, so you can have a lot of competition and no sales because of it (even McDonalds limits where the stores go. You can't have one on every street corner.)
So it's a bad business model, bleeding money at every step. And THIS is why it's not taught at major university business schools (or wasn't the last time I looked.) They teach economics (micro and macro), accounting, finance, marketing, entrepreneurship, etc, etc... but not MLM.
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